The popularity of annuities – especially fixed index annuities – with people planning for retirement is on the rise. Americans are living longer and longer, so guaranteed lifetime income is essential to the success of any retirement plan. Since the vast majority of employers have eliminated pensions, understanding the benefits of fixed index annuities is more important now than ever before.
It is estimated that only about 20% of American workers currently have a pension plan. Most employers, if they still offer any kind of plan, have shifted to defined contribution plans, such as 401ks. Why? Transfer of risk.
In a defined benefit plan, such as a pension, you are guaranteed a specific income payment in retirement. This places the burden of risk on the plan provider should the plan suffer poor earnings. By changing to 401k plans, employers have shifted the risk away from themselves and onto the employee. If your 401k does not perform well, you will have less money to withdraw as income in retirement. The plan does not provide any kind of safety net.
By purchasing a fixed index annuity, you can shift the risk of losses away from yourself. Fixed Index Annuities offer 100% principal protection in case the market drops, while giving you the opportunity to earn gains based on growth in the stock market. When you are ready to retire, an annuity can also provide you with guaranteed lifetime income.
As people are becoming more aware of how annuities can fill the income planning void in retirement, annuity sales are consistently increasing. According to a recent report by the Insured Retirement Institute, annuity sales topped $57.5 billion for the third quarter of 2013, which is an 8.7% increase over 2012. But, the largest area of growth in 2013 was a 31% increase in sales of plans that protect principal, like Fixed Index Annuities.
This trend shows that when people are planning for their financial futures, safety and income guarantees are of utmost importance. Because of advances in healthcare, the typical American can expect to live 25 or more years in retirement. In some cases, people actually need to draw retirement income for more years than they earned money working. With concerns over the future of social security and stock market volatility, knowing you have a guaranteed source of income you cannot outlive has never been more important.
In the past, investors could rely on a conservative stock and bond portfolio to provide lasting income of 4% of the total account value. To put it mildly, times have changed. The financial markets are simply too volatile now for the “4% rule” to hold true. With two 50% market crashes in the last 13 years, those who were relying on brokerage accounts for income in retirement are struggling financially.
The good news is, fixed index annuities can provide income streams of up to 6% of the contract value each year for life, and many products have provisions that allow the income check to grow with the inflation. As consumers are becoming increasingly aware, these products provide a combination or safety and income that can’t be found anywhere else.
Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer.